Quick answer: no brainer, they’re going to be higher. The government will need more tax receipts to pay the growing interest on its debts.
With the UK economy shrinking 20.4% between April and June, more than any of the other 37 OECD nations, the government is borrowing at record levels to balance its finances with total debt now £1.95 trillion, more than the size of the economy for the first time since 1963.
This record debt is being defended by the Chancellor as a price worth paying to prevent even bigger economic costs such as more unemployment and lower output and is affordable as borrowing is cheap. It’s difficult to disagree with this.
How long can this continue for though? The government is surely watching closely what happens as lockdown is eased and the economy might need even more support leading to some tough decisions ahead.
For the time being, the government can afford to support the economy through borrowing. But at some point, taxes will surely have to rise. The government can’t keep borrowing like this each year forever.
This makes tax planning vitally important for your personal finances.
So… what can you do?
• To summarise upfront, you need to maximise your existing tax advantages and allowances as they could all be less generous in the future.
• If you have existing cash or investments or add to either routinely, make sure they are held in an ISA. They’re tax-free and ISAs avoid them being subject to income tax and capital gains tax which could easily be higher in future.
• If you contribute to a pension, pay in as much as you can afford because I think the generous tax breaks for doing so will not be as good in the future.
• If you have earnings and don’t contribute to a pension, I think you should. As above, you need to take advantage of the tax breaks for doing so while they are as generous as they are right now.
• If you are a business owner, the most tax-efficient way to draw your earnings is still a nominal salary and dividends thereafter with employer pension contributions as well. Consider structuring some shares in your spouse’s name where possible.
• If you are a property investor, claim all the allowances you are entitled to, offset all your expenses and keep any loan interest costs down – with interest rates so low, mortgages are cheap as chips these days. Perhaps pay off more capital each month with the resulting surplus cash flow and/or pay it into a pension instead.
• Couples should optimise their tax position so you can both be as tax efficient as possible.
• Inheritance Tax is a vast topic and not one I can do justice to in a 500-word blog! On the one hand, it is the easiest tax to avoid – just give everything away and live seven years. On the other hand, that’s not particularly practical! If you are concerned about IHT, pick up the phone to talk to us about this further.
Government debt will probably never fall, it will probably keep rising each year. But actually, that’s okay if the innovation (hopefully) brought about by the coronavirus pandemic produces sufficient prosperity to make managing the debt affordable. It will be fascinating to watch how this all unfolds.